OREANDA-NEWS. Fitch Ratings has affirmed Miejskie Przedsiebiorstwo Komunikacyjne - Lodz Spolka z o. o.'s (MPK) revenue bond programme's Long-term secured debt rating in local currency at 'BBB-' and Long-Term National rating at 'A(pol)'.

The affirmation reflects the revenue bond programme's maintained sound liquidity and our expectation that it will remain sufficient and well protected until maturity and continue to be ring-fenced from MPK's other operations.

KEY RATING DRIVERS

The City of Lodz regularly remunerates MPK for the Lodzki Tramwaj Regionalny (LTR) tram transport service, the construction of which was financed from the PLN166m revenue bond programme. At end-May 2016 PLN94m was outstanding under the bonds, accounting for 36% of MPK's debt. The remuneration and the city's annual equity injections into MPK significantly exceed annual obligations to bondholders.

We project that the remuneration for LTR transport service and the equity injections will exceed the annual bond obligations until 2021 by at least 1.7x, limiting the risk for bondholders. We assume satisfactory liquidity for the revenue bond programme will prevail until maturity in 2030. In the last settlement period (June 2015-May 2016), the payments made by the city totalled PLN30.9m and exceeded the annual bond obligations (PLN9.7m) by 3x.

The bondholders enjoy special legal protection. They have first claim on revenues from LTR transport service, on the equity injections made by the city and also have a pledge on LTR assets that excludes them from the bankruptcy estate. During the programme's duration, Lodz is obliged to contract with MPK LTR transport services and inject equity into MPK, securing sources of servicing the revenue bonds in the long term.

The remuneration for LTR transport service is relatively stable, at around PLN24m annually, which accounts for about 4% of the company's revenue. MPK's remaining revenues mainly stem from public transport service (except LTR), which is contracted by the city (2015: 56% of revenue). The LTR transport service remuneration and equity injections are made to a designated account; the venture account (VA), to ring-fence revenue from the LTR assets from MPK's other operating risks. MPK can only access the VA for purposes other than relating to the bond programme if the amount within the account exceeds 12 months of bond service.

MPK is the city's internal public transport operator in the Lodz area and is of strategic importance to its sole owner. We believe that the city is committed to ensuring the company's financial viability and may provide additional financial support if necessary.

RATING SENSITIVITIES

MPK's revenue bonds' rating may be downgraded if the special protection of the bondholders weakens or if the liquidity of the venture account deteriorates significantly. Any weakening in the strategic importance of MPK to the City of Lodz, leading to reduced willingness to support the company may lead to a downgrade.

A full guarantee from the City of Lodz, which is unlikely, covering all MPK's obligations under the revenue bond programme or a strengthening of the city's credit profile could lead to an upgrade.